Reasons for optimism on China’s economy heading into 2024

[AUDIO LOGO] * The end of pandemic-era lockdowns was expected to power China's economy forward. But after a year of stagnant growth, are things starting to look better for 2024? Joining us now to discuss is Haining Zha, Vice President and Director for Asset Allocation Research at TD Asset Management. Haining, great to have you back on the program. * Thanks for having me. * We're going to talk about all things China. Let's start with the year that we had. As we said, there was pretty big expectations heading into this year as what China could deliver. Didn't really happen. What stood in the way? * Right. I think the biggest disappointment for people is they underestimate the amount of damage done to the household balance sheet, and to the business in general. So as soon as the economy opens up, the activity quickly shot up. But then the consumer spending, in particular, went into a slump. And the business, already fragile after the lockdown, seeing there is not enough demand, they are also pretty cautious in hiring. So in the end, the economic activity actually turned into a slump. * The second thing people underestimate is the amount of fiscal drag this year. So contrary to the US, which enjoyed a very positive, surprisingly positive fiscal upside, in China it's actually the opposite. Basically, the dynamic is once the economy recover, come out of the lockdown, the revenue of the government recover, but their spending actually slowed down, because many of the local and provincial government, they still have a lot of fiscal pressure. They have a lot of debt on their balance sheet. * And I think the third thing is in the real estate sector, because the pandemic has completely changed people's expectation on the housing price and the perceived supply and demand in the real estate market. And also the real estate developer, they are still mired in default and the restructuring process. So that actually created a lot of sentiment hit in the real estate sector. * And also, after the overspending in the developed economy during the pandemic, the goods consumption is actually going into a slowdown for most of where the demand coming from. That's why you see the Chinese export is actually not doing well year-over-year. I think the latest print is about down 6% year-over-year. So all of these factors, when you add them together, it is a formidable pressure. * I felt like in the early innings of the year for the first several months that every time you did see this indication, oh, perhaps China is not picking up the way we thought it was going to, and then the market participants say, well, just wait. Wait for the stimulus to come. And then there was little things, but it never really came. What do you think China was worried about in terms of, the economy is weak, let's just stimulate and get it back on track. Didn't really happen. * Right. I think there are two factors. One, is China want to take a very measured approach, because they know there is a lot of leverage in the economy. So they want to reserve as much room as possible. And they want to carefully observe where the economy is going. And also, the second thing is, in the first quarter at least, you got a sudden burst of activity. So at that point, you really don't need to do that much. * Let's talk about then, those are the conditions that led to a disappointing year for China's economy, when we thought it would be a much different story. As we head into December and then get into 2024, what is China's economy looking like? What can we expect? * We are actually a little bit more optimistic. Right now, the economists' consensus estimate is in 2024, Chinese economy will grow by about 4.5% year-over-year. We actually think there is a mild upside on that. So looking at the same factors that when we review the 2023, for example, on the consumer spending, I think after consumer or the household restocking their emergency savings, and be very cautious on spending, the consumption the last few months is actually gradually picking up. * So in July, the retail sales consumption is at 2.5% year-over-year. Now, in October, it already recovered to 7.6% year-over-year. So even if you exclude some of the category that have unique dynamic, for example, auto or restaurant and food because of reopening, it is still pretty solid at above 6%. And not all of it is because of year-over-year base effect, because if you look at the October number last year, it was still not bad. * When you talk about that, that sounds like domestic demand sort of picking up the Chinese economy next year. You did talk about the fact that in the West, as we pull back on goods spending, move more of our money towards services, we're not buying as many as China's products. Could that be a wild card for next year, depending on how we land? I mean, there's a big debate, right? Was it a soft landing, a hard landing, no landing in Western economies on the other side of it? Will our appetite for Chinese goods be a big driver? * Yeah, it certainly will-- could be a headwind, because right now, we are seeing US consumer is actually softening a little bit, given that the excess amount of savings is actually on the way down. But this year, the export base is already pretty low. So that constitutes less of a headwind for next year. * And also, there are some other domestic factor as well. For example, we talked about fiscal drag. Last month, China just approved 1 trillion RMB worth of special treasury issuance, which will be used for infrastructure spending. Counting its multiplier effect, it will constitute about 1.2% of GDP. So that is a big amount. And also, many of the easing measures, they really kick in after the end of third quarter. For example, the lowering of the mortgage rate on existing mortgage stocks in our calculation that amount to about $400 billion RMB, which is amount to 0.3% of GDP. So essentially, all of those amount can be converted into spending, extra money in the consumer pocket. So that will also lend some support as well. * If we take all this and put it together, what could it mean for Chinese stocks for the market there? * Right. I think the read on the Chinese stock will actually be a lot more nuanced, because 20 or more percent of the weight in the index on the CSI 300 is in the financial sector. As we know, the real estate and financial sector, they still need to deal with a lot of the pressure. So that part of the market might not perform as well as people expected. But they are starting at a very low valuation, basically 0.5% PB and a pretty good dividend. So as long as the Chinese economy can hold on well, and maybe catch up in momentum, I think it is hard for me to imagine that they will have all of a sudden, big drawdown. But some of the other sectors, for example, EV and solar, they might have better dynamics next year. [AUDIO LOGO]

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